Is there a Studebaker Corp.-type broken pension promise lurking in a few public employee pension plans?
Employees who earn pensions ought to have a guarantee protecting their accrued benefits from any cut by the plan sponsor. But that's not the case for public employees in a number of states. At corporations, pensions accrued by employees become, under the Employee Retirement Income Security Act, a liability of the corporation, backed up to certain a level by the Pension Benefit Guaranty Corp. But a number of states offer no guarantee to prevent a sponsoring municipality or state government from reducing accrued benefits at any time, say, during a severe economic downturn affecting public revenue. This must be changed.
Texas is one of a few states lacking such protection. But the Texas Association of Public Employee Retirement Systems, Houston, hopes to remedy that shortcoming. It is leading an effort for a state constitutional amendment that would guarantee pension benefits promised to public employees in the state, said Randy Stalnaker, association president and chairman of the trustees of the $2 billion Dallas Employees' Retirement Fund, one of 88 public sponsor entities that are members of the association.
ERISA was enacted to guarantee corporate pension promises. Even so, that guarantee comes under pressure all the time. Employees at a few companies have sued corporations, alleging deliberate reduction in accrued benefits in cases involving how the sponsors calculated benefits, or over the conversion of traditional defined benefit plans to cash balance plans. At Enron Corp., employees are concerned about the potential loss of pension income stemming from the use of an ESOP in its defined benefit plan.
No public entity is proposing a reduction in Texas, according to W.J. Blythe Jr., executive director of the Texas association.
But Messrs. Blythe and Stalnaker say a state supreme court ruling from the 1930s enables public sponsors to reduce benefits.
The courts today might not uphold that ruling anymore, said Gary Lawson, attorney at Lawson & Fields PC, Dallas, whose firm is counseling the association on the effort. But it could take costly and protracted litigation by employees to win protection. A constitutional amendment would forestall such action, said Messrs. Blythe, Stalnaker and Lawson.
The association is drafting the amendment and talking with legislators, hoping to have it introduced when the Legislature reconvenes next year.
The amendment would not guarantee cost-of-living adjustments or defined contribution plan benefits, thus not encumbering public sponsors with overgenerous promises, they added. The amendment wouldn't provide a state-type PBGC to ensure benefits. But they hope the amendment would encourage better funding by imposing without question the liability on the public entity sponsoring the benefits. But that is no assurance. They said Oklahoma has a strong protection for accrued, vested benefits. Yet the Oklahoma Teachers' Retirement System is one of the worst-funded state-run pension plans in the country, Jonathan Foreman, professor of law at the University of Oklahoma, has written in Pensions & Investments. But at least the vested benefits are guaranteed, although not adequately funded.
The few other states where protection isn't clear ought to do what is necessary to provide a guarantee. Some public plans guarantee only vested benefits, allowing the possibility of changes to benefits before vesting. That is a problem, especially when the vesting period is long. The State of Wisconsin Retirement Research Committee's survey of 85 major public plans in the country found 25 require 10 or more years to vest. Fortunately, 55 plans require only five years, the same as the maximum corporate requirement, or fewer to vest.
A pension for public employees is not a gratuity; they earned the benefits. Come to think of it, at the federal level the same should be done for Social Security, whose promise of benefits aren't guaranteed, let alone actuarially funded, and in fact already have been cut in recent years by virtue of a rise in the official Social Security retirement age.
